How long before the Central Bank investigates the mis-selling of interest rate swaps to Irish business

At long last this morning, the Central Bank of Ireland (CBI) announced that it is investigating the practices of six named financial institutions in the selling of Payment Protection Insurance (PPI)* to consumers from August 2007, a cut-off date that conveniently just misses the first half of 2007 when there were record sales of the type of products which might have been sold on credit – cars, furniture and electrical goods. PPI is a type of insurance sold to consumers when they’re taking out loans – for example when they’re buying a car – which should cover the repayment of the loan in the event of some misfortune, redundancy perhaps. The suspicion is that PPI was sold to consumers who couldn’t have benefited from the insurance, eg if they were contract workers, they mightn’t have been covered by the redundancy terms of the policies.

These six institutions will now be writing to borrowers with details of the investigation and how claims might be made. In addition to the named instutions, there are other institutions being investigated but the CBI is not yet at the point where it can announce the further steps that will apply to those additional institutions.

It’s a start, and a very late start –remember it was 2009 in the UK when the full magnitude of the PPI-misselling scandal became known and since then, over €2bn has been refunded to consumers there. In Ireland which tends to have similar banking practices to the UK, it was only in February 2012 when the CBI scratched its backside and started a preliminary investigation, and despite being chivvied along by politicians, notably the Fianna Fail spokesman Michael McGrath, it has taken eight months to get to the point of today’s announcement. If you were of a cynical nature, you might suggest the CBI is again more interested in protecting the finances of banks than protecting consumers. With 300,000 policies sold in Ireland since August 2007, the compensation bill could be huge.

So PPI is at least now being addressed. But what of the other expensive financial scandal in the UK, the misselling of so-called interest rate swaps? “Swaps” sound more complicated than PPI, but really boil down to insurance policies which meant if interest rates went up, the borrower could claim insurance to cover the increased payment. The thing is that banks missold these insurance policies, for example by selling policies with terms which exceeded the term of the loan. In the UK, the Financial Services Authority (FSA) is investigating several banks including AIB and Bank of Ireland for misselling swaps, and there is talk of the overall bill for the UK banking sector running into billions. One bank alone, HSBC has made a provision for claims of €200m.

Back in July 2012, it was reported that Cortina-averse developer David Agar had settled a €30m case with Ulster Bank following a court case in Dublin’s High Court. So, is the CBI examining issues with misselling swaps here? It seems not.

On 18th September, 2012 the Sinn Fein finance spokesperson Pearse Doherty has asked the Minister for Finance to outline what steps our own CBI and Financial Regulator had taken to ensure there hadn’t been widespread misselling here. Deputy Doherty received a complete non-answer which could almost be characterised as contemptuous, it certainly is ignorant of the implications of the Agar settlement. The full exchange is here.

Deputy Pearse Doherty: To ask the Minister for Finance following the uncovering of mis-selling of interest rate hedging products such as caps, collars, swaps and structured collars in banks in Britain, the steps taken by the Central Bank of Ireland and the Financial Regulator to assess if similar issues have arisen with the selling of similar products by banks operating here.

Minister for Finance, Michael Noonan: Options, futures, swaps, forward rate agreements and any other derivative contracts relating to interest rates or yields are defined as financial instruments under the Markets in Financial Instruments Directive (MiFID). Credit institutions are subject to the MiFID Regulations when providing services in such instruments. The Central Bank of Ireland is responsible for the supervision of such activities when they are provided to clients. Clients can be categorised as retail, professional or eligible counterparties. The recent incidents of alleged interest rate misselling in the UK appear mainly to directly involve professional or eligible counterparty clients. There are less onerous conduct of business obligations on the level of protections to be applied to professional or eligible counterparties than to retail clients. For example, eligible counterparties are not subject to the best execution protections.

The Central Bank is currently mapping the MiFID services being provided by credit institutions with a view to ensuring that the best interests of consumers of financial instruments are protected and that the integrity of the market is upheld. In this context issues such as those raised by the Deputy will be considered and dealt with accordingly.

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An interesting aside to this are those who were brought to the courts for defaulting on loans they thought they had insured that have now been declared suspect by the central bank. And what of those pre-07 who are on defaulter lists because of this.

Whatever about the Central Bank, it is well known in legal circles that the bewigged ones are busy preparing substantial swap mis-selling litigation against the Irish banks and Ulster Bank in particular. It seems to have led the charge to promote and sell these products through its UK Treasury Department in the RBS. Rumour is that it has in excess of €1 billion in legal claims from its Irish clients coming at it over the next few months.

“Mis-selling”, as far as I know, is an expression that was coined in 1990s’ Britain to characterise *consumer* financial service transactions in which the seller failed to carry out what was then a new statutory duty to satisfy him- or herself that the transaction represented “best advice” for the client. The imposition of this duty was a modification of the common-law rule of caveat emptor. (Some of us strongly hold that caveat emptor is not applicable at all to advice situations – even when the advice is “sold” – but that is another topic).

Generally speaking, “mis-selling” would not be appropriate to the context in which financial swaps were undertaken. Consumers don’t do swaps.

That does not mean that non-bank users of such derivative products were not wronged. Actually, even some bank users were wronged (by other banks). But I fail to see why the State or its financial regulator should have a role in sorting out commercial difficulties between substantial and presumptively “adult” corporate entities. If your statements about Mr Agar’s case are correct, his case illustrates how such disputes can be resolved between “adults”.

(It also undermines my aside above that advice is another topic – I would imagine that challenges to swap contracts rely on attempting to show that the “sellers” of such contracts made inaccurate representations, effectively equivalent to advice, about the contracts)

So, my answer to the question in the title of the post (by the way, what happened to the question mark ?) is “Infinitely”.

@Fergus, the media disagrees with you and has characterised the issue with inappropriate interest rate products being sold to business customers as “mis-selling” – see Telegraph which has led on this issue in the British press, Guardian, British Independent and FT eg

In Ireland, the CBI is sticking its head in the sand, and who knows, maybe the Statute of Limitations might eventually take care of any issue. Odd though that the two pillar Irish banks, AIB and Bank of Ireland are being investigated by the FSA in the UK.

Interestingly, when I studied advanced corporate finance, the professor’s message on almost every case study was simple; “These products are designed to make money for the banks and should almost never* be bought by businesses.”